Treasuries Find Support After Disappointing Non-Farm Payrolls Report
Fundamentals
The September non-farm payrolls report was a bit of a disappointment for those who believed that the economy was on an upswing, as the Labor department reported that 263,000 jobs were lost last month. This was well above average analysts' estimates of between 175,000 and 200,000 jobs lost. The unemployment rate also ticked up by 0.1% to 9.8%. The largest job losses were seen in construction, manufacturing, and retail trade. Not even the government was hiring, as this sector was reported to have shed 53,000 jobs. Not all of the report was gloom and doom, as the August employment figure was revised for the better, with "only" 201,000 jobs lost vs. the originally reported 216,000. Since the "official" start of the recession in December of 2007, it is estimated that over 7 million jobs have been lost. The U.S. has not seen this many jobs lost since the 1930's. Today's report sent a moderate bid through the treasury complex, just after the report was released, causing yields on 10-year treasuries to fall to their lowest levels in nearly 5 months. However, with the December 10-year futures moving towards resistance at the 120-00 level, selling pressure emerged as traders long Note futures booked profits. A continued weak U.S. Dollar also may have sparked some selling in treasuries, as fears of rising inflation in the futures makes current yields on treasuries much less attractive for long-term investors. Though Fed officials continue to believe that the worst of the economic decline is behind us, there are few signs that the recovery will be quick, and the jobless rate could continue to climb before we finally see a bottom in the jobs market. This may force the Federal Reserve to continue its current policy of keeping interest rates low for some time, which could help to keep a bid in the treasury market.
Trading Ideas
Traders in 10-year note futures are caught between bullish fundamentals, which could send prices higher and strong technical resistance which may call for lower prices. Given this conundrum, some traders may wish to explore positions that will benefit from a large move higher or lower. One such trading strategy would be buying straddles in 10-year note options. For those who do not know, a long straddle consists of the purchase of a call option as well as a put option in the same contract month and the same strike price. An example of this trade would be buying the December 119.50 straddle. With the TYZ9 contract trading at 119-14.5 as of this writing, the straddle could be purchased for 2-40 points, or $2,625 before commissions. The premium paid would be the maximum loss on the trade, with the position showing a profit at expiration if the December 10-year notes are trading above 122-04 or below 116-28.
Technicals
Looking at the daily chart for December 10-year notes, we notice bulls currently have the upper hand, as prices are above both the 20 and 100-day moving averages. The 14-day RSI is also strong, with a current reading of 68.07. However the 120-00 area looks to be strong psychological resistance. The Commitment of Traders report shows both large and small speculators are holding a net-short position in 10-year note futures, which could cause a short-covering rally if we can see a weekly close above the 120-00 area. Support is seen at the 20-day moving average, currently near the 117-20 area.
Mike Zarembski, Senior Commodity Analyst
